Andrew Miller, a regulator contributor to the blog, is passionate about the intersection of academic finance research and financial planning. We obviously love the academic finance research stuff, but our financial planning advice lacks serious depth: spend less than you make.

So we rely on Andrew to help us understand how all the geeky investment research can contribute to financial planning and helping investors achieve their goals.

Andrew has a recent paper that looks at how trend-following managed futures programs can improve “safe” withdrawal rates for retirees. If you’re an advisor and looking to understand how and why managed futures should be considered in an investment portfolio, we encourage you to dig in. In what follows is a summary of the key results from the paper and some follow-on resources.

An Introduction to “Safe” Withdrawal Rates

As humans, we love heuristics and one that has gained quite a bit of traction in the financial planning world is the “4% rule of thumb.“(1)This heuristic states that a recent retiree can plan on withdrawing an initial 4% of her retirement portfolio (50% US large cap stocks & 50% intermediate US government bonds) and adjust the dollar amount by inflation (up or down) every year and there is a very high likelihood that the portfolio won’t be depleted for at least a 30-year period of time.

However, this 4% rule of thumb implicitly assumes that stocks and bonds will earn their historical average real rates of return.There is some debate about if one should expect historical average real rates of return from stocks going forward, but we think it is prudent to assume that one shouldn’t expect bonds to deliver their historical average 2.3% real rate of return going forward as 5-year TIPS are priced at 0.35% real return (2% below historical average) and 30-year TIPS are priced at a 0.9% real return.

What impact might low real interest rates have on “safe” withdrawal rates?